SOTU: Winners, Losers and a Tax Plan that Makes Me Go “Huh?”

I watched last night’s State of the Union address in hopeful anticipation that all taxpayers, from individuals to small business owners to multinational corporations, could look forward to a fairer, more simplified system. No such luck. Much of the

speech was spent pointing out who or what is to blame for the sluggish economy, income inequality and lack of domestic manufacturing jobs. First the winners, in order of mention:

  • General Motors the “world’s number one automaker”
  • Masterlock’s “unionized plant”
  • Community colleges
  • Siemens company
  • Clean energy companies
  • Teachers

Now the losers:

  • Banks that “lent to people who couldn’t afford or understand the loans”
  • Regulators who “looked the other way”
  • Wall Street that “played by its own rules” (I am starting to wonder if Wall Street is a person, he gets blamed for so much)
  • Outsourcers
  • Chinese workers
  • Multinational companies
  • Chinese tires (Tires? Really? Do I need to go outside and admonish my car?)
  • Colleges and universities that raise tuitions
  • Oil companies
  • Banks (again)
  • Oil companies (again)
  • Health insurance companies
  • Wall Street (again)

This is not to say that the above-mentioned industries, people and things have never gone ethically astray. We all have. But while the president tossed about phrases such as “playing by the rules” (about a dozen times, by the way) and “fair share of taxes,” he described very little method in the couple of tax proposals he presented to the American people.

Corporate taxes. The main focus of his tax talk was corporate taxes. He acknowledged that the United Staes has one of the highest corporate tax rates in the world, yet there

was no mention of cutting the corporate tax rate across the board. Instead, the issue was skirted around by his proposal to remove tax cuts for firms that shift jobs overseas, take the money saved, and give it to companies that keep jobs in the United States – in particular, rewarding high-tech manufacturers. There are many reasons that companies establish plants and production overseas. Often times it is because overseas consumers are purchasing goods from American companies, and it becomes more efficient to produce them in an area where the market abounds. Why punish companies for being efficient? Not to mention, government does a poor job of picking winners and losers, as was evident with Solyndra.

Payroll taxes. It was just a matter of time before the president and supporters of the payroll tax reduction (both Democrats and Republicans alike) would start referring to it as a “tax hike” if it were to expire. Yet the 12.4 percent Social Security tax has been in effect since 1990. Now that workers are accustomed to the 2 percentage point reduction which took effect in 2011, it will be impossible for the payroll tax to return to the rate it has been for 20 years. There is no evidence that the payroll tax cut has stimulated the economy, but there is evidence that the liabilities of Social Security will grow larger as this source of funding is whittled down.

Taxes on the Rich. Finally, with Warren Buffet’s secretary playing a prominent role in the audience, the president proposed a change to the tax code so that millionaires pay their “fair share.” If you make more than a million dollars a year, you should pay no less than 30 percent of your income in taxes, according to the president. But let’s do a little fact-checking here:

  • If a single individual earns one million in adjusted gross income strictly from wages in 2011, his effective tax rate would be about 32 percent under the current tax code.
  • For those earning one million or more, a share of this income most likely comes from capital gains, which are currently taxed at 15 percent for high-income earners.

So my underlying conclusion, which was not mentioned in the SOTU, is that if millionaires must pay 30 percent of their income in taxes, the capital gains tax will have to increase. This increase would depend on how much of a millionaire’s share of income is in capital gains. Using a back-of-the envelope calculation, suppose an individual has an adjusted gross income of exactly $1,000,000, but only one-third of it is from wages, while the remaining income is from capital gains. In order for this millionaire to pay 30 percent of his/her income in taxes, the capital gains rate would have to be 31 percent, double its current rate.

Doubling the capital gains tax rate for high-income earners will most certainly discourage investment. Ironically, investing in the economy was one of the central messages of the SOTU. But apparently, high-income earners who have money to invest will be excluded from this communal effort.

Bottom line: the SOTU address leaves me scratching my head…


Comments (4)

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  1. Buster says:

    It’s sad that politicians have to use scapegoats to blame for problems created by… politicians.

    It’s sad that politicians have to use scapegoats to blame for problems created by… politicians. Outsourcing occurs because there are comparative advantages in some countries. These take the form of cheap labor, fewer environmental regulations, lower taxes, etc. You would think that some enterprising politician would champion lowering the corporate tax on goods manufacturing in the United States to make domestic industry more competitive. If anything, current tax policy encourages corporations to outsource.

  2. George says:

    The term “millionaire” went out with the 10 cent cup of coffee. It used to mean a million dollars in the bank, now apparently it means annual gross income. Misuse of the term only adds to the public’s misperception of what’s at stake with a 30 percent minimum tax on “millionaires.” Same confusion with saying the 30 percent is on people “earning” more than $1 million (implying salary) when net capital gains are thrown into the mix. One glimmer that sense may prevail was Obama’s mention of reforming the tax code within his the State of the Union address immediately before throwing out this 30 percent rate; overall tax reform (corporate and individual) that considers “double taxation” at the shareholder level among other considerations would be refreshing.

  3. Joe Barnett says:

    The Alternative Minimum Tax was enacted because some millionaires legally paid no income tax, but it affects millions of taxpayers who aren’t millionaires and billionaires. 15% sounds like a nice flat rate, as economist David Henderson pointed out in this NCPA article .

  4. Joe Barnett says:

    The 2-month payroll tax holiday extension will likely be renewed, putting Social Security further in a hole. Instead of extending it just for one year, some enterprising member of Congress (or presidential candidate) should propose extending the tax-rate reduction for 10 years, but put the money (more of it) into accounts for low-middle income folks, and take away benefits for higher income folks dollar for dollar. Thus, it could be made progressive. It’s not a tax increase, because the workers will own the accounts. It’s paid for by reducing long-term SS obligations. Democrats might oppose it because it isn’t “stimulative” but actually it would be. Some people would respond to the addition to their wealth by reducing other savings (spending it instead). In the case of those for whom it was new savings they would not have otherwise made (lower income people), they will be on track to have some savings when they retire.

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